What should you do with your RRSP?

DURHAM -- Next Friday is March 1, the deadline to contribute to your Registered Retirement Savings Plan.

Why have an RRSP? How much should you put in? What about a Tax Free Savings Account? What if you need money? Is it a good idea to take some out of an RRSP?

There are as many questions as there are Canadians scratching their heads over what they should be doing when it comes to retirement saving.

So, we asked Chris Buttigieg, Senior Manager, Wealth Planning Strategy, BMO Financial Group, to help us answer a few questions.

1. How does one choose: TFSA or RRSP?

- Both programs play important roles in helping Canadians save and invest in a tax-efficient manner. They complement each other and should be used in unison, so it's important that investors understand their differences.

- Ideally, Canadians should be contributing to both a Tax Free Savings Account and a Registered Retirement Savings Plan because they each offer distinct advantages.

2. How does one determine how much to save annually?

- Determining how much to save per year will depend on an individual's age, life stage and how they envision their retirement.

- Some people's retirement plans are minimal, while others may have extravagant plans in mind such as travelling the world. Each require a different amount and will determine how much to save during your working years.

- Talking to a financial professional and creating a financial plan that includes a retirement component can help identify how much to invest and save annually. This will help ensure your unique situation and goals are taken into account and you will have saved a sufficient amount set aside to fund your ideal retirement lifestyle.

3. What are the benefits of an RRSP?

- An RRSP is a tax-deferred savings vehicle that is designed specifically to help Canadians save for their retirement. It's also a wise investment tool because:

- Investment growth is tax-sheltered until withdrawn, meaning your retirement savings have the potential to grow faster than if you invested outside of an RRSP.

- Contributions to an RRSP are typically tax deductible, lowering annual taxable income and income taxes payable.

- RRSPs can hold a wide range of qualified investments.

- Funds can easily transition to retirement income.

- Spouses can split income to reduce their combined taxes payable.

4. Should people with defined benefit pension plans be contributing to RRSPs?

- A pension plan should not be the only retirement vehicle an individual has to fund their retirement.

- An RRSP and a TFSA are equally important investment tools that can help save for retirement, and RRSPs are especially effective for self-employed individuals or those who do not receive a workplace pension.

5. Have most people saved enough?

- As mentioned previously, 'saving enough' is very unique to each individual. That being said, many Canadians, 81 per cent in fact, according to BMO's Small Business and Retirement study, are considering working or opening a small business during their retirement years -- primarily for the added income.

- This could be because people are concerned that their current retirement savings will not be sufficient enough to fund their retirement income needs.

6. Is there an optimal mix of investments (guaranteed investment certificates (GICs), mutual funds, stocks, bonds, and cash) for an RRSP?

- While there is no single optimal number of investments one should have in an investment portfolio, investors should seek to diversify their holdings in a variety of investments, i.e. equities, bonds, and cash, across a variety of sectors.

- One key approach to any investment program is the implementation of a proper asset allocation. This should take into consideration an investor's time horizon, liquidity needs, risk tolerance and investment goals and aspirations.

- A portfolio should include the five major blocks -- a cash component for liquidity, a fixed income portion (to protect the downside), and well-diversified Canadian, U.S. and international equity blocks to provide you with growth.

7. Should men and women approach retirement saving differently?

- Men and women should approach saving for retirement in the same manner - starting to invest in an RRSP early and contributing often.

- One never knows what will happen down the road so it is important that each individual feels they are appropriately saving for their future on their own terms.

8. What is the most common mistake people make with their RRSP?

- Not contributing to an RRSP and thus not taking advantage of the tax deduction available to reduce income taxes in the current year is the biggest mistake Canadians make.

- Additionally, not investing and saving early enough is another common mistake because that means you are not able to take advantage of the tax-deferred growth and compound growth an RRSP allows you.

9. Should I withdraw money from my RRSP to pay off debts?

- Because funds withdrawn from an RRSP are considered taxable income, the only time you should withdraw is when you are in a low income tax bracket and you don't have other taxable income.

- If you are earning income you should be using that income to pay down debt and not relying on your RRSP savings which are intended for your retirement.

- For those not working and have high interest debt, they can consider dipping into their RRSP savings as they will be in a low income tax bracket. This will hurt retirement savings in the long run, but will prevent them going further into debt.

10. Should I use a tax refund to pay down debt or put into my RRSP?

- High interest debt (such as credit card debt) should be paid down first, and then individuals should put their extra cash (such as a tax refund) into their retirement savings.